Graphic Packaging Holding Company

Good day and thank you for standing by. Welcome to the Graphic Packaging First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Melanie Skijas, Vice President, Investor Relations. Please go ahead.

Good morning and welcome to Graphic Packaging Holding Company's conference call to discuss our first quarter 2021 results. Speaking on the call will be Mike Doss, the company's president and CEO, and Steve Scherger, executive vice president and CFO. To help you follow along with today's call, we will be referencing our first quarter earnings presentation, which can be accessed through the webcast. via self-directed slides, and also on the investor section of our website at www.graphicpkg.com. I would like to remind everyone that statements of our expectations, plans, estimates, and beliefs regarding future performance and events constitute forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from the company's present expectations. Information regarding these risks and uncertainties is contained in the company's periodic filings with the Securities and Exchange Commission. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date on which they are made, and the company undertakes no obligation to update such statements except as required by law. Mike, I'll now turn the call over to you.

Thank you, Melanie. Good morning to everyone joining us on the call on webcast today. I'm pleased to report a solid start to 2021 in what can be described as a truly unique operating environment. We continue to deliver organic sales growth, capturing new, real opportunities in growing markets with our innovative fiber-based packaging solutions. Global adoption of paperboard multi-packs and keel clip packaging solutions for beverages, paperboard trays including our new paper seal and produce pack lines for food packaging, and IntegraFluid, a ship-and-own container package for omni-channel commerce, all are examples of products that are driving our results. We remain encouraged by the traction we are seeing from our innovative packaging solutions with existing and new customers in growing markets around the world. Aligned with Vision 2025 and supported by our history of successful acquisitions, we are announcing today our intent to acquire AmeriCraft Cartons, The proposed transaction will provide benefits to our customers, employees, and stakeholders. I will provide additional details on this development shortly. Turning to slide three, let me update you on a high-level financial and operational highlights for the quarter. Growth continued in the first quarter of 2021 with net organic sales increasing 2% year-over-year. Notably, this follows a very strong first quarter of 2020 where net organic sales growth was 7%. Over the last 12 months, we've exceeded our targets, delivering 3% net organic sales growth. Stronger than forecasted sales growth is the result of ongoing conversions to more sustainable fiber-based packaging options across our food, beverage, food service, and consumer goods markets. In addition, our business has benefited from increased at-home consumption. Importantly, we continue to have confidence in our 100 to 200 basis points goal for annual net organic sales growth established with Vision 2025. Achieving consistent year-over-year organic sales growth is supported by the strengthening global trend to more sustainable packaging alternatives. As we look out specifically at the year to the anticipated volume from our innovation pipeline coupled with return to growth in food service, we expect 2021 net organic sales growth will be at the high end of our 100 to 200 basis point range. Adjusted EBITDA in the quarter of $240 million met our expectations before the $29 million of costs we incurred associated with winter storm URI. During the quarter, we did see a return of inflation across some of our commodity input cost categories such as logistics, recycled fibers, resins, and chemicals. We are executing multiple price initiatives with our customers to fully recover the current inflationary environment. Our commitment to price offsetting commodity input costs remains a pillar of our overall value creation model for stakeholders. Also during the quarter, we made further progress on the Vision 2025 goal of achieving 80% to 90% paperboard integration across our consolidated business. We exited the first quarter of 2021 at 71%, improving from 70% in the full year of 2020 and 68% in 2019. We expect to benefit from a meaningful increase in our paperboard integration rate as we start up the new CRB paperboard machine in Kalamazoo later this year while winding down a portion of the existing supply agreements. In addition, we will drive paperboard integration rate higher as we grow our converting volumes both organically and through acquisitions. Our partnership with International Paper continued to wind down during the quarter as we acquired another $400 million of minority partnership interest, reducing their interest to 7% from the initial 21% held at the inception of the partnership. In addition, work on our CRB platform consolidation project in Kalamazoo continues ahead of schedule with the new K2 machine set to begin paperboard production in the fourth quarter. Planning related to our more recently announced investment in Texarkana to convert an existing SBS machine to swing capacity capable of also producing CUK is tracking on time and on budget. This represents a very efficient path to meet increased global demand for CUK and further advances our efforts to closely match supply with areas of strengthening demand. Continuing the capital allocation discussion, let's move to slide four, where I will provide an overview of our intent to acquire AmeriCraft Carton. We have entered into an agreement to acquire AmeriCraft Carton for approximately $280 million. The company is one of the largest remaining independent converters in North America with over $200 million in annual sales, operating seven well-capitalized and high-quality converting facilities. The company has a great reputation with customers, has been in business for over 100 years, and generates approximately $30 million of annual EBITDA. We see 300 basis points of paperboard integration opportunity across all three substrates and expect an additional $10 million of synergies over 24 months following the close. The transaction is expected to close in the next few months. Turning now to slide five in the discussion of innovation and new product development, I will focus my comments this morning on projects and work underway in our plastic substitution growth platform, one of three growth markets we are targeting with a $7.5 billion total addressable market opportunity. We have discussed with you in past calls the significant ongoing conversions to paperboard solutions we are seeing in our beverage and food service markets. An additional area of expansion for us is into food categories around the perimeter of the grocery store. We've targeted and are seeing success in new categories as we align our global innovation resources and have established frameworks to execute on the biggest opportunities. On slide six, I will provide details on our paper seal innovation. With the launch of PaperSeal in 2020, we targeted a $1 billion addressable market opportunity to replace foam trays and shrink wrap alternatives commonly found in the grocery store meat departments around the world. Our PaperSeal packaging innovation offers producers and retailers significantly increased food tray recyclability as well as enhanced branding opportunities. We have seen traction in Europe and Australia with a list of retailers, including Aldi, SF, ECA, Lidl, Marks & Spencer, and Woolworths, adopting our packaging for meat and poultry products. We have tests underway in North America and are on track to be commercial in the region in 2021. Building on early momentum of PaperSeal, we are executing a product expansion with the launch of PaperSeal Slice and PaperSeal Wedge. The recyclable barrier line paper packaging format now offers the same ease of use and sustainability benefits for sliced deli meats and cheese categories. The packaging ensures hygienic and shelf life characteristics that match existing packaging alternatives. The design allows for enhanced branding and meets the requirements for high-speed food manufacturing lines. Turning to slide seven, we are also targeting and expanding in another category found at the perimeter of the store, produce. With our produce pack line, we are offering a variety of fully sustainable, shell-threaded solutions for protecting and preserving fresh fruit and vegetables. ProducePak offers significant branding advantages in an eco-friendly container versus existing alternatives. The leading Michigan apple distributor, Bell Harvest, recently switched to ProducePak for its Fuji, Honeycrisp, and Gala apples in response to consumer preference for fiber-based packaging. With the launch of our new Punnett tray line, we are extending our offerings to new categories like berries and snacking-sized vegetables. Our global marketing, sales, and innovation and sustainability team members are working closely together and are focused on winning in today's market. Sustainability is a key part of every new product development discussion and is central to our go-to-market strategies. We are engaging with external stakeholders to learn more about consumer preferences, product direction, and the evolving needs in the marketplace as we move to a more environmentally conscious society. Providing packaging enhancements for consumers that include 100% recyclability and reduced carbon footprint will be the key to our new product development roadmap moving forward. Let me conclude on slide eight, revisiting my comments made at the end of what was an incredible year in 2020. We are creating value through leadership with our vision 2025. Simply put, we are running a different race. The investments we have made to advance our capabilities, engage employees, and optimize our mill and converting infrastructure differentiate us. We are leaders in sustainability because we have built our business on it. Our packaging solutions are made primarily from renewable wood fiber from sustainably managed wood baskets in the United States, and the vast majority of our fiber-based packaging can be recycled today. As a result of prudent capital management and strong cash flow generation, we have invested back into the business and have continued to enhance our service offering to meet global demand and consumer preferences. We are delivering on new product development opportunities with customers and achieving our sustainability supported growth goals. With the proposed acquisition of AmeriCraft, we are positioned to further strengthen our growth outlook, adding new customers and end markets while driving greater paperboard integration. We are confident in the pipeline in front of us to achieve 100 to 200 basis points of annual net organic sales growth and expect to be at the high end of that range in 2021. Our ability to help customers reduce their environmental impact and elevate their brands through continued innovation and improvements in packaging is expanding opportunities and driving growth. Steve, I'll now turn it over to you.

Thanks, Mike, and good morning. Moving to slide nine, focused on key financial highlights in the first quarter of 2021, net sales increased 3% from the prior year to $1.65 billion. driven by 2% net organic sales growth and acquisitions. Adjusted EBITDA declined from the prior year quarter, primarily related to $29 million in costs associated with winter storm URI and maintenance downtime. As a result, adjusted earnings per share were 23 cents as compared to 31 cents in the first quarter of 2020. Global liquidity remained significant, at $1.44 billion. Additional financial and market detail can be found on slide 10. Solid sales performance was driven by continued strength in food, beverage, and consumer markets where sales before acquisitions increased 5%. Partially offsetting this performance was our food service business where sales declined 10% versus the prior year period. Importantly, food service sales improved to flat performance year-over-year in the month of March and are inflecting positive for a month to date April versus the prior year. This is encouraging and largely as expected as we see a return to more away-from-home consumption as vaccinations are rolled out and as we anniversary the beginning of the COVID-19 pandemic. On slides 11 and 12, you will see our year-over-year revenue and EBITDA waterfalls. Net sales increased $50 million in the first quarter of 2021, driven by $33 million of improved volume mix, resulting from a combination of 2% organic sales growth and acquisitions, partially offset by fewer selling days when compared to leap year observed in the prior year quarter, as well as $20 million of favorable foreign exchange. Adjusted EBITDA decreased $55 million to $240 million in the first quarter of 2021. Adjusted EBITDA benefited from $21 million in improved net productivity and $5 million from favorable foreign exchange. EBITDA was unfavorably impacted by $3 million of pricing, $2 million of unfavorable volume mix, $34 million of commodity input cost inflation, $13 million of other inflation, and $29 million of costs related to winter storm URI. Excluding storm-related costs, adjusted EBITDA was $269 million, consistent with our expectations. As Mike mentioned in his remarks, we experienced higher inflation across certain commodity categories during the first quarter, and we are successfully executing multiple price initiatives to offset inflation. Back on slide 9, you will see that industry operating rates remain strong and backlogs are quite elevated across all of our paperboard substrates. In addition, AFMPA first quarter data reflects declines in industry inventory levels with balances significantly below historical five-year averages. FMPA industry operating rates at the end of Q1 for SPS and CRB were 92% and 94% respectively. Our CUK operating rate was over 95% as we remained in an oversubscribed environment. Backlogs increased from last quarter and were six-plus weeks in SPS and CRB and eight-plus weeks in CUK at the end of the quarter. We ended the quarter with net leverage at 3.7 times. While leverage is above our long-term targeted level of 2.5 to 3 times and our 2021 target of 3 to 3.5 times, we remain confident in our cash flow generation commitments and increase in expected cash flow generation in 2022. Referring back to slide 3 and highlights in the quarter, since the beginning of 2021, we have strengthened our balance sheet, debt maturity, and interest rate profiles through very effective borrowing arrangements. We issued $800 million in two senior secured notes offerings. What is notable about these transactions are the annual interest rates, the 2024 notes at 0.8% and the 2026 notes at 1.5%. We also retired $425 million of maturing higher interest rate bonds with an attractive farm credit system loan. And earlier this month, we completed an amend and extend to our bank credit facility, which notably extended the maturity date from January 2023 to April 2026, and increased the availability under the domestic revolving line of credit by $400 million. Our significant liquidity, balance sheet flexibility, and strong cash flow generation remains a source of strength to the company. We have excellent optionality, and as Mike detailed for you, we are executing a balanced approach to capital allocation. Turning now to the guidance on slides 13 and 14. Underlying demand for our fiber-based packaging solutions remains strong. As Mike mentioned, we expect 2021 net organic sales growth to be at the high end of our 100 to 200 basis points target range. We are meeting demand, introducing new products, and growing organically. We remain steadfastly focused on achieving the growth goals we established in Vision 2025. We are executing multiple price initiatives to offset quantity input cost inflation. We continue to expect that our volume mix and net performance will be in line with our original expectations for the year as we earn on organic sales growth at the high end of our expectations and execute performance countermeasures to offset winter storm URI-related costs. While some components of adjusted EBITDA have changed given the operating environment we are managing, our full-year adjusted EBITDA guidance range of $1.09 to $1.15 billion provided at the beginning of 2021 remains unchanged due to the numerous pricing, volume, and productivity initiatives we are committed to successfully executing throughout the remainder of the year, all of which will result in stronger adjusted EBITDA performance in the second half of 2021. As such, there is also no change to our full-year cash flow guidance range. Thank you for your time this morning. I will now turn the call back to the operator for questions.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press the pound key. We ask that you please limit yourself to one question and one follow-up question. Thank you. Your first question comes from Mark Connolly from Stevens. Please go ahead. Your line is open.

Mike, how much of your newer sustainable packaging represents two categories? First, new customers, and then second, new rather than replacement business with existing customers?

Good morning, Mark. Yeah, so it's a mix of both of those things. I mean, if you think about, you know, KeoClip as an example, that's a new product to an existing customer for the most part. And if you look at some of what we're profiling today with some of the protein packaging and fruit packaging that we've outlined, those will represent, in many cases, new customers. that we're selling new products to. So I'd ask you to think about the 100 to 200 basis points. And again, as we said, this year, we're going to be at the high end of that ring based on what we see in our new product development pipeline and commitments we already have from customers. It's almost half and half.

That's great. That's great. Nice percentage. And Steve, you mentioned the return to away-from-home consumption. And I'm curious, Steve, Is it too early for you to be able to see headwinds coming on the businesses that benefited from the shutdown away from home? Clearly, you've got a lot of organic growth that is more than offsetting, but I'm just curious if you're at a position yet to quantify any headwinds.

Yeah, thanks, Mark. Good morning. As we mentioned in the remarks, we have seen a good positive pivot from flat to growth in the food service business from March to April. What gives us some of the confidence that we're conveying to you around the high end of the overall volume range is we haven't yet seen anything material in terms of moving away from the at-home consumption. Obviously, that's something we've talked about in the past. We've talked about kind of the teeter-totter effect that we shared with you previously, but we haven't really seen indications of that materializing. And some of the ongoing at-home consumption and some of the trends around where people work, even in a post- environment, we haven't seen anything that we characterize as material. Our customers remain quite confident in their volumes as they kind of look through the, certainly through the next couple quarters. Anything to add to that, Mike?

No, I think, Mark, it just, you know, that adds up to what you saw in terms of the backlogs on the paperboard side. I mean, if you normalize February, you know, for the outages, you know, incurred, you know, due to the storm, you know, you've got operating rates in the mid-90s, mid-upper 90s, actually. really across all three sub-trades, you know, backlogs that are at, you know, historical highs relative to the five-year average and inventories that are substantially down against the five-year average, as Steve, you know, talked about it all according to VA and EPA statistics. And so, you know, that creates a very favorable operating environment for us.

Sure does. Thank you very much.

Thanks, Mark.

Your next question comes from George Stafford from Bank of America. Please go ahead. Your line is open.

How are you doing? Thanks for the details. I want to go to the first question, use the first question for AmeriCraft. So doing some very rough calculations, it seems like the business realizations and mix is pretty comparable to graphic packaging, but could you talk a little bit about where the end market weightings might be somewhat different than yours? What kind of mix of business does it have relative to yours? And what kind of retention do you expect or retention loss do you expect that we should be trying to model into our numbers?

Yeah, so thanks for the question. I would characterize it this way. It's food and consumer packaging. It just tends to be a little bit more of a regional focus, you know, book of business. There's very little overlap with our existing, you know, customer set, virtually none, as a matter of fact. And, you know, our expectations are that we won't see material loss of businesses.

okay thanks for that mike and then i want to come back to guidance and you mentioned you're maintaining your forecast uh considering the multiple price increases additional productivity actions i may have left out some things that you've mentioned but could you point to you know one or two things in particular the emphasis that you are putting and applying that makes you comfortable in the guidance? And relatedly, can you, to the extent possible, talk about what pricing increases that have been announced are in your guidance? And if there are any price increases that you've announced that are not in your guidance, just so we know how to size our forecast based on what ultimately happens in the market one way or another. Thank you, guys.

Yeah, thanks, George. It's Steve. I'll take that on, and we can add any additional color. I think on the pricing front, inherent in the guide for the price-cost spread, based upon recognized pricing, known and recognized pricing in the marketplace, as well as very specific initiatives that we're pursuing, We have line of sight to $90 million of price this year in 2021. And that's what's in the guide, that which is known and recognized. We're executing on and pursuing pricing that adds up to over $200 million that would obviously in our benefit later this year and into 2022. But in terms of the guide, there's $90 million of price in the guide. Most of that, in fact, the vast majority, 80 million of that, we will see in the second half of the year, which really speaks to the changes and the things that we've done to compress timelines and be able to execute on pricing in a way that keeps any dislocations relative to the inflation, we'll talk about in a moment, shorter and shallower. On the inflation front, We saw $34 million of inflation in the quarter, a little over 5% of our commodity input cost spend. Our guide has that continuing in the 4% to 5% range, or roughly $100 to $120 million of inflation. And so that's hence the modest change to the price-cost spread that we provided in the guidance. So just repeating that, 4% to 5%, $100 to $120 million of inflation, $90 of known price, $200-plus that we're pursuing. Which results, George, just to finish that off, in a pretty significant inflection, first half to second half financials. In the first half of this year, we incurred almost $40 million of maintenance downtime. and weather-related costs that will inure to a positive 30 in the second half, so almost a plus $70 million. On pricing, similar, very modest pricing in the first half, under $10 million, upwards of $80 in the second half, and the $90 million. So again, a $70 million type inflection. So those are the very specifics to provide you with regards to what we're executing on, what's in and not in our guide.

Steve, Mike, thanks. I'll turn it over.

Thanks, George.

Your next question comes from Mark Wildey from Bank of Montreal. Please go ahead. Your line is open.

Thanks. Good morning, Mike. Good morning, Steve.

Good morning, Mark.

First question, I just wondered if you could give us a little more color on AmeriCraft, you know, some sense of who the seller is. some sense of asset quality and whether you kind of see any opportunities for, you know, facility rationalization coming out of this and what percentage of AmeriCraft's board you were providing going into the process.

Yeah, thanks for that. So I'll cover those points. First off, just a solid point. Shout out to the Johnsons who are the owners of this business and have been for a long time. They've built an incredible business. We're very pleased to be able to have their company joining ours as we go forward here. The basic statistics we walked through in the script, it's a little over $200 million in sales. There's 110,000 tons of paperboard. We had about 35,000 of that, you know, so it went split, you know, kind of across the CRB and SPS grades. There's a little bit of CUK in there. They've got seven, you know, well-capitalized facilities that, quite frankly, are all in attractive markets for us and attractive locations. So, look, we, every year, as you know, Mark, are always looking at our asset footprint and trying to make decisions around how best to utilize and optimize that footprint. But as we go into it, we're going into it that, if anything, we'll look to scale these facilities and It worked to enhance them over time. You know, the synergies that we pointed out, the $10 million, that's largely through, you know, board integrations and procurement savings, you know, just given the size that we have. You know, but this is a nice bolt-on, and the tuck-under part of this is actually relatively straightforward. We're really, really excited to have AmeriCraft join in our company. Okay, that's helpful.

Just as a follow-up, Mike, I wondered – if you can talk briefly about what the sustainability proposition is for some of this paperboard packaging that's laminated with barrier film. I'm very aware that over in Europe, and particularly the UK, products like the composite can have come under a lot of fire because they aren't recyclable. And I'm just wondering whether we've got some of the same issue here with some of this paperboard laminated with plastic packaging.

Yeah, it certainly is the same issue, unless you've got an institutional way of recycling, which is really what you're referencing relative to some of the concerns there. And again, Mark, that's why we're so focused on our eliminating low-density polyethylene coatings on the inside of our cups, as an example, and pursuing the water-based coatings, which we're making very good progress on here with our customers, because we want to position the business to increasingly become more you know, environmentally conscious with the products that we provide. I mean, the end-use consumer has spoken. They appreciate fiber-based packaging. To your point, what we have to do is find ways to provide those functional barriers in a way that's still readily recyclable, and that's something we're actively working on, you know, really all the time with our new product development team. Okay, fair enough. I'll turn it over. Thanks, Mike. Thank you. Thanks, Mark.

Your next question comes from Gabe Hedgeby from Wells Fargo. Please go ahead. Your line is open.

Mike, Steve, good morning. I had a question about, I guess, the organic volume commentary and then kind of shifting towards the upper end of what you were kind of expecting coming into the year. And quite frankly, it's seemingly at odds. I mean, I know that you talked about transitioning away from maybe discussing tonnage or absolute volume figures, but kind of what was reported in the first quarter and part of it might be housekeeping and If you can give us maybe, Steve, an impact from the days, the shipping days from the week here and the prior year on volumes, maybe that will help us. And then, again, I guess kind of revisiting the commentary on volumes. Anything from your customer perspective that you can share with us that gives us confidence in the volume outlook?

Yeah, Gabe, good morning. Let me just start and then Mike can add on with the back half of your question. But yeah, you're correct. If you look at it on a raw tonnage basis, a couple things to keep in mind. Quarter to quarter, year over year, we close the white pigeon mill. exited from some of the corrugated small volume that we did. So that volume was taken out of the company. When you factor in the leap year, you've got 15,000, 20,000 tons that kind of comes from the realities of less true production days. But also importantly, we had almost 40,000 tons of production impact there. in the quarter associated with winter storm URI. And so that's one of the reasons that our open market sales were down is we didn't have the tons to sell. Our inventory levels have come down materially. We obviously service all of our customers effectively. But we had 40,000 tons of actual production removed from the quarter. So those Kind of those four things added up will give you a sense for what, as you said, kind of an ad line level on that particular slide that you're referencing is why there's some modest down. What we look through in all of that are our integration rates and the actual volume we're seeing on our integrated platform, which was the 2% that we conveyed to you today.

Maybe, Gabe, just to build a little bit on that, talk about the momentum here. As Steve said, I mean, if we would have had more tons, we could have sold more in the quarter, and we could be selling more right now, too. We're having to actually be very thoughtful in terms of how we allocate our tons, both internally and externally, relative to the demand profile that we've got right now, given the inventories are down, as I mentioned, over 100,000 tons today. year over year for graphic. And in some cases, that's caused us to have to do more trucking of paperboard to, you know, converting plants as... Our confidence in being in the higher end of that range, you know, it's high. And this is a very good paperboard market right now. As I mentioned earlier, you know, the operating rates adjusted for the storm are at least in the mid to upper 90s. And you've got your backlogs that are growing. And that's a function of, you know, growth in the overall folding carton sector. And again, it's As I've clarified here, inventory is not only for us, but for the industry or down according to the FDA data. So it's a very healthy and growing market right now.

Thanks for the detail there, guys. And then a two-part question as a follow-up. I know you guys are not in the business of providing quarterly guidance, but if we were to adjust for the $29 million of URI hit and call it kind of Q1 would have come in, I think you guys will say directionally $270 million. Would you expect kind of Q2 taking into account year-over-year basis, similar level of maintenance outage, and I think what's implied of $10 million of favorable price, such as you kind of be directionally in that range or a little bit better for the second quarter? Or is there anything else that I should be thinking about that I'm missing?

Yeah, Gabe, we don't provide it on a quarterly basis, but you've got most of the parts correct. I mean, I think Q2 will look more like last year's Q2, maybe modestly better. And then as we talked, the inflection that we spoke about relative to actual maintenance downtime, run strategies, as well as price execution will enter most of the benefits in Qs 3 and 4. Great.

Thank you, guys. Thank you.

Your next question comes from Adam Samuelson from Goldman Sachs. Please go ahead. Your line is open.

Thanks. Good morning, everyone. Good morning. I was hoping to maybe continue on the line of questioning on the demand environment. And I know in the paragraph you talked about April improving versus a year ago levels on the food service side. Maybe can we talk relative to 2019 in your key channels? I feel like it's a more appropriate kind of baseline.

given the comps get really wonky over the next few months? As we think about kind of some of your different consumer channels, food service, kind of how far are we back to normal or above normal in some cases? And as we think about the world continuing to normalize moving forward?

Yeah, Adam and Steve, that's a very, very good question. Don't have the facts sitting in front of us on that, but just to kind of give you a sense for what we're seeing, what we are pleased with is that food service business here in April, you know, is inflicting back to the levels that are approaching where we were in 2019 in terms of moving back into that kind of a trend line. So if you're doing a true, you know, multi-year trend, look through. We're pleased with what we're seeing in that business in April. We're not all the way there, obviously, back as things haven't completely returned to norm. And what's positive around traditional food, beverage, consumer packaging is that a lot of the organic growth innovation-oriented products are making their way through the market relative to 2019 into here into 21. So those would be naturally up, driven by the actual organic sales growth that we've shared with you. If you kind of look through 19 into 21, you'd have a net step up. in growth from organic sales driven by innovation efforts and new product developers.

Okay, that's really helpful.

And then a clarifying question on the pricing comments that you made in terms of the 90 that you've got direct line of sight to, and I think it was over 200 of actions that are underway. I just want to make sure I understand the scope of that. Does that include the contracts that you have with customers specifically

that are raw material-based, and so that there's a more contractual pass-through, or the actions that are contractual with customers outside of that discussion?

Yeah, thank you, Adam. It's an all-inclusive number, so it includes the multiple price initiatives and actions that we have underway at any point in time, and these are the known ones that we're executing on, so it would be known received and recognized pricing. It would be how our cost models are playing out with customers. It would be actions we're taking to increase prices with non-contract customers. It would be freight initiatives that we have to go to four openers a year rather than two. It would be other terms and conditions that we're modifying. So that was an all-inclusive 90 million of things that we know we're executing on, and then the 200 would be what lies ahead of us in terms of either announced or other initiatives that we're pursuing but are not in the guide.

Got it. That's all really helpful. I'll pass it on. Thank you.

Sure, Sam. Thank you, Adam.

Your next question comes from Mark Weintraub from Seaport Global. Please go ahead. Your line is open.

Thank you. Just following up on the last question, can you give us a sense as to how much of the $200 million where you have actions in motion might be cost pass-through, so where you can have a really pretty high degree of certainty even at this point?

Well, I guess, Mark, that is largely based on what goes into effect in May. And so it would follow a similar algorithm to what we've been seeing on these other increases that we've done and have been scored through April. So I think that's how you need to think about it. And I guess what I would add to that relative to pricing is, you know, if you look at this market, as I've said a couple of times here, this is a really good paperboard market. And, you know, as Steve just outlined, A number of the T's and C's really across the board with our customers because we actually have leverage, given the high demand profile that we're seeing here. And what we're doing is making sure that we're going out and getting paid and recovering for the input cost inflation that we're seeing come through the business and the value that we're providing customers. And in order to do that, you know how it works. We've got to be willing to put some business at risk. And that, in fact, is what we're doing here at Graphic relates to these pricing initiatives that we've got out there. So as Steve mentioned, we've got 90 already recognized, and we've got initiatives of well over 200. The vast majority of that, as he mentioned, will be kind of a late Q4 because of the lag that we see, but strong momentum as we head into 2022, not knowing that what the inflationary environment will be. So we feel we're getting out in front of that in a good way and really positioning the business for success over a multi-year period of time.

Right. And to make sure I fully understand it, if I can just one. So even if we have another highly inflationary year, such as we're having this year where you're suggesting 100 to 120, if you were to get this full amount, you would expect that price-cost spread to be favorable to 80 to 100 million? And then if it's even less inflation and assuming success on all the various initiatives, it can even be a bigger number. Is that the way to think about it?

Well, it would over time, Mark. I mean, if inflation, you know, moves up materially from the kind of four to five percent inflation that we've talked about, then obviously the cost models would pass that through on the reduced lags that we've been referring to. And so, obviously, things move along the way. And if we saw incremental inflation of substance can we would continue then to take other price actions across the other mechanisms that we have with market-based models as well. So this is a point in time based on all that we know specifically that we're trying to provide to you. And then obviously it variates or is variable depending upon what we actually see relative to inflation over the coming quarters.

Understood. Thank you. And one quick other one, if I could. Now, obviously, all the customers see the price increases coming, and so to the extent they were able to, I would imagine they would want to increase inventory ahead of time. At the same time, I'm not sure that there is much in the way of carrying converted inventory. Can you provide a little bit of color, or should one be thinking that customers are trying to build inventory, or do they really not do that and or cannot do that?

It's a small component of it, Mark, if it happens at all, to tell you the truth. And the reality of it is, as I mentioned, we lost 40,000 tons due to winter storm Uri. Our supply chains are actually disrupted and our inventories are low. And as a result of that, as I mentioned, we're having to allocate tons both internally and to external customers. So we don't see this as inventory building.

Thank you.

Your next question comes from Anthony Petinari from Citi. Please go ahead. Your line is open.

Good morning. On C-U-K, you talked about backlogs, eight-plus weeks, which is pretty remarkable. I'm wondering if you could talk about, you know, if there's a couple of categories or end markets that are really driving that continued strength versus S-B-S. And then on the Texarkana conversion, I think you had talked earlier about a 300,000-ton machine. You'll be able to swing production in one queue of next year. If you had that capability today, would that all go to CUK? I'm just wondering if you could talk about how you'll be able to use that asset.

I appreciate the question, Anthony. It's a very good one. Relative to what's driving the global growth of CUK, it's largely beverage. And it's this movement on a global basis to kind of replace plastic solutions with our paperboard, our fiber-based solutions, things like Keoglip and Fully Enclosed. not just here, but also in Europe and really around the globe. And so, as we mentioned at our last call, you know, to run our business this year, we're buying over 50,000 tons, you know, from various suppliers globally, you know, to make sure we have what we need. So relative to what we'd be doing if we had the Texarkana mill, that optionality we'd have, having a fifth, You know, CUK machine capable of going on that grid, yeah, that'd be excellent. And that's really why we wanted to make that investment, you know, and we're on track, as we mentioned here. Our plan is to have it done in Q1 of next year. We've ordered the major components. Our curtain coater and our sizing breasts are on order. We're finishing up the engineering work on that, but I'm really excited about the optionality it'll give us to be able to swing back and forth between coated SPS and CUK. It's going to be a neat capability. that we have would be able to, with the investments we're making, be able to have our C-U-K with, you know, cost parity with what we're doing in Macon and West Monroe. So we like that investment. And between that and what we're doing in Kalamazoo, given the demand of these markets, those capital investments look quite fortuitous.

Anthony, just to add on to that, as we've shared other conversations as well, we've converted, you know, about 5,000 tons of run rate from CUK to SBS. So part of this swing machine, that too would be converted back into CUK most likely. And so between that and the purchases, I think you can think of it as half of the machine is probably easily convertible upon when we complete the work.

Okay, okay. That's very helpful. And then you highlighted the impact from the winter storm to your tons. I'm just wondering if there's a lingering impact from a raw material perspective, specifically around things like, you know, adhesives and glue. Have you lost sales because you haven't been able to procure materials from some of those Gulf Coast suppliers? Is that a risk in 2Q? Is there any other kind of color you can give there?

Yeah, happy to do it. So we did not incur any more downtime for an inability to get materials to operate in our mills other than the 40,000 tons related directly to the storm. And that was, again, in Texarkana and in West Monroe. Having said that, we had to substitute certain latexes and adhesives in order to manage supply chains. and ensure that customers got what they needed. And again, being a global company, we were able, on the adhesive side, to actually get some adhesive from Europe and bring that in to keep all of our converting plants up and operational. As of May 1st, the vast majority of those supply chains are restored, meaning we're getting the material from our existing suppliers prior to the storm, albeit at higher prices, as we outlined in the inflation comments that Steve put forward. So we didn't lose material sales on the converting side related to that. As Steve mentioned, if we would have had the 40,000 tons, we could have had more external paperboard sales for sure.

Okay, that's helpful. I'll turn it over.

Thanks, Anthony.

Your next question comes from Gancham Punjabi from Baird. Please go ahead. Your line is open.

Hi, good morning. This is actually Matt Krieger sitting in for Gancham. How are you guys doing today? Good, Matt. Great. So given the emphasis on passing price through to customers, not only across your own footprint, but across the consumer supply chain overall, how do you believe that these hikes will impact consumer spending from a product category perspective in terms of branded versus private label? And then does this sort of shift have any impact on your business in any particular fashion from a margin or a volume perspective?

So that trend on private label versus branded has been kind of well underway for a period of time, Matt. So I would expect that to continue to be the case as consumers look for value and quality, quite frankly. I think the bigger trend that's going to be interesting for us to watch, and we view it as a tailwind here, is the fact that more people are going to be working from home for longer. Yes, the return to work will bring some office workers back in, but as you've seen, and it's been really well chronicled, and the journal and other news agencies here, is that there is an expectation that more people will be working from home. And again, 95% of what we do is food and beverage. And so if people are at home, there's you know, a reasonable belief that you could have that we would see, you know, ongoing demand that would be different than what we saw before. Now, on the other side of that, we could see some food service that may be not quite as strong. But as Steve mentioned, we're seeing a nice bounce back there, you know, here in April, which was really our low watermark, you know, last year at this time. So I think that's how I'd have you think about it. Obviously, the retailers are going to have to do their work relative to the store brand, you know, consumer brands release their results already announced are going to take price because they're seeing things come at them. So I think that'll play out here over the next six to nine months.

Great. That's helpful. And then I just wanted to dig into some of the volume mix impact expectations for the year with my next question. So can you talk a little bit about how you expect full-year volumes to perform by product category during 2021? And if there's any particular mix benefits or impacts that we should consider as consumer mobility improves throughout the year? I guess I'm kind of aiming this at food service versus non-food service type volumes.

Yeah, I wouldn't, Matt. I mean, overall, our profitability levels have a lot of commonality across the whole portfolio, so I wouldn't expect you to see anything that is particularly mix-oriented. I think what we have confidence in is that at 2% organic growth, there's a good solid top line that comes along with that that we'll earn on at margins pretty consistent with where we earn on it as a company. And so if you kind of look at the 2% growth and the 100% $30, $140 million range, and we earn on it appropriately. It gets you into the range that we're talking about, setting aside a little bit of the headwind in Q1. Plus, we have a little bit of acquisition-based year-over-year earnings in there early this year. So I wouldn't focus too much on the mix component. I'd focus more on the actual volume organic growth component.

Great. That makes sense. That's it for me. Thank you. Thanks, Matt. Thanks, Pat.

Your next question comes from Phil Ng from Jefferies. Please go ahead. Your line is open.

Hey, guys. You know, with your leverage now at the higher end of your target, you know, I assume a lot of the excess cash is going to be used to delever. But can you talk about how you prioritize, you know, buybacks and M&A in all the next few years?

Yeah, Phil, Steve, you know, we have a long-term commitment here to a balanced approach to capital allocation, and I think it proves itself out quarter to quarter. And we take those decisions as we see them in front of us relative to our strategies. So there are times when we're putting capital to work in a more intensive way, like we're finishing up this year with the Kalamazoo investment. There are times where the M&A is timely and the right thing to do. We put that to work. There are times where we've been dislocated, we believe, from a share price perspective, and we've bought back the company in pretty material ways. And then obviously we've returned some value to shareholders in the form of the dividends. So it's an always for us. We do know that this year we'll probably be in the three to three and a half times range. We're probably on the higher end of that with everything that we've brought forward this year. But our confidence in the cash flow generator movement into 2022 is very high, which gives us the ability to speak with confidence around getting the leverage ratio back into the kind of long-term two and a half to three over time.

Phil, the other thing I'd add to that is if you think about, and Steve kind of profiled, you know, the financing events that took place. over the quarter and last year as well, is we're borrowing money very efficiently. And if you look at M&A in particular, it was a little lumpy, right? You don't control when quality assets come to the market. So we've got to have that kind of flexibility to be able to move And when an opportunity presents itself, that's strategic and core to our overall vision for what we want to drive the business. So I think that's, you know, as we've said before, if we see those types of things, we're willing to lever up a bit as long as we see a clear path to de-levering, you know, very quickly, you know, as Steve outlined. So hopefully that helps you.

Yeah, that's great, Mike. It sounds like, you know, you know, if there's a good deal on the table or you see a dislocation in your stock price, you're not refraining from buybacks or M&A. So that's encouraging given your confidence here, free cash flow profile. And I guess the product you talked about today on paper seal, it looks pretty interesting. Can your customer run it on existing equipment? Is it agnostic to the film that you would use and any drop-off in terms of performance like shelf life?

We can run it on our existing equipment, which is important, but the customer actually needs a line, and we've got a partner there that we partner with that actually makes the machine.

Okay. Is it a big capital investment for the customer, I guess, if they didn't have?

No, it's not.

Okay. And then from a film perspective, you could pretty much run anything, or it has to be like a partnered film that you have for this product in particular?

No, we're agnostic on the film.

Okay, great. All right. Really exciting.

Thank you.

Your next question comes from Kyle White from Deutsche Bank. Please go ahead. Your line is open.

Hey, good morning. During the quarter, you pointed to the 15 to 20 million headwind related to the storm, and it came in higher than that. Just curious what drove the increase relative to your initial expectation. And then following up on that, what is offsetting this impact that is allowing you to maintain your net performance guidance in that $70 to $90 million range?

Yeah, Kyle, Steve, just very briefly for you, with regards to the $29 million versus the $15 to... we had to announce that early. We were in the market with the $800 million of secured bonds that we were successfully executing on, so we conveyed that as a material event. But it was very early in the process. And so as such, as it played out, as we worked through some of the challenges that Mike talked about earlier, overall the cost just went up. But it was a function of us needing to be in the market with that material knowledge early in the process. As you may recall, we were pretty early in it. What gives us confidence on the overall productivity is that we don't have the recovery boiler downtime this year. We have less downtime, and our overall confidence in our productivity going into the year was quite high. Unfortunately, the weather impact took away what we felt was the potential for upside, but it's why we believe we can still maintain our overall commitment to productivity and that net performance in that $70 million to $90 million range for the year.

Got it. That's helpful. And then you're highlighting paper seal and your new produce pack. Are you seeing market penetration for products offering such as these in your kill clip in the U.S.? Or are you deliberately focused more on the international and European market first? And then related, why might the U.S. be slower to adopt these products despite everything we're hearing from consumer packaging brands on sustainability? Yeah, so it's a little bit of a mix. So, you know, Q-Clip has definitely been more Europe-centric up to this point, although we have a number of applications and sales that will take place here in North America towards the end of this year. We're right on track with where we thought we'd be. We've got over 20 of those machines installed in Europe already. We're learning a lot about how those are running, optimizing their performance. And again, as you know, Kyle, we're selling these to large CPG and beverage companies, and they've got global footprints. So if we're successful in one market, they'll look to bring that into other markets as well. We're highly confident in that. We've seen that before with other packages that we've done. In regards to some of the produce pack stuff, that's here in the U.S. As I mentioned, the punnet tray here is for an apple producer in Michigan, as an example. You put those together, those are a lot of base hits, but that's really what gets us confidence in the $7.5 billion addressable market we pointed out to in the three main platforms there, and that particular one being plastic substitution. It used to be in a bag, now it's going to be in a tray that's made out of, solid fiber.

Your next question comes from Arun Viswanathan from RBC Capital Markets. Please go ahead. Your line is open.

Great. Thanks for taking my question, guys. Good morning and congrats on the results. I guess first off, you know, you laid out the $90 million of price that you expect and the $1 to $1.20 of commodity cost inflation. So if you look at that $1 to $1.20,

what are the components um that have inflated the most and uh do you expect any moderation any of those components as we could move forward here uh is that what's embedded in in your outlook yeah just briefly uh on that obviously we're not going down to the by category level but as mike mentioned you know secondary fiber chemicals energy logistics drove the 34 million dollars and we would expect for the quarter and we would expect that those to be the primary drivers on a pretty consistent basis for quarters for the remainder of the year that's inherent in the $100 to $120 million. So we don't see different categories necessarily, but we do see some inflection up for some categories like logistics that would maintain that over the year. Hence the range. Obviously, things can move inside of that, but that's how we're thinking about it.

Okay. And I just want to revisit the price commentary as well. You know, it looks like, you know, you mentioned very high operating rates across most of the substrates. Do you guys feel that the price-cost dynamic has improved over the last couple years? I know you've shortened the lags to six months, but I know there's been some capacity additions also in SBS. But maybe if you just look at the three grades. You can just comment on each one to see, you know, again, if you feel that the price-cost dynamic has improved in any of them. I imagine so in CUK, just given the demand strength. But what about CRB and SBS?

Yeah, so, Arun, I'll answer that. I mean, relative to all three grades as a basket, which is how we need to look at those, you know, given some of the, you know, substitution around the edges, I'll characterize it as one of the strongest paperboard markets that I can remember. I've been doing this a long time. So relative to how that looks and what gives us confidence in our pricing is really the strength of those markets. And relative to the lags, and Steve mentioned this, I mean, the algorithm for pricing in our business is substantially different than it was in 2016 and 2017, the last time we saw a big run of inflation. As you're seeing, mid-year here, we've got the better part of $80 million worth of pricing that's going to take place here in the second half of the year. That's substantially faster, and as Steve mentioned, it's going to result in a shorter and shallower dislocation. And if we see additional inflation, we're going to take more price. That's just how we need to deal with it in the marketplace. And again, we can't predict what inflation will do. We've given you our best analysis as we have around 4% or 5% of our COGS here, roughly on average around $110 million of inflation, which is what we're expecting right now as we sit here today. But if it's more, we'll have to take more price. And again, with these markets and the strength of those, we'll continue to push those graphic because we have to offset our input cost inflation.

We are out of time for questions today. I would now like to turn the call back over to Graphic Packaging CEO, Mike Doss, for closing remarks.

Thank you, everyone, for joining us this morning. During the fourth quarter, we met strong demand with our fiber-based packaging solutions and captured continued organic growth. We remain intensely focused on achieving the pricing, growth goals, and performance improvements we shared with you today. And we look forward to updating you on our progress the next time we speak at the end of the quarter. Thank you. Have a good day.

This will conclude today's conference call. Thank you for your participation. You may now disconnect your lines.